Should you dive into liquid CDs?

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Liquid certificates of deposit can seem very appealing, but they're not for everyone.

Yes, these CDs do offer one tempting advantage: no-penalty withdrawals. Traditional CDs typically sock you with early-withdrawal fees if you need money before the maturity date arrives.

But the "gotcha" for liquid CDs is that terms, conditions and rates for them vary widely. They have no penalties, but only if you abide by preset withdrawal limits or amounts. And their lower rates mean that you sacrifice yield for more flexibility.

“Liquid CDs are a marketing strategy. They're never attractive enough to recommend.”

Banks determine when you can take your first penalty-free liquid CD withdrawal, says Brad Levin, president of Legacy Wealth Partners in Woodland Hills, California. The upshot: If you buy one of these CDs, read the small print and follow the bank's rules or you may trigger hefty early withdrawal fees that wipe out earnings. You usually have to wait about 7 days before you can make any withdrawal.

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Not good in emergencies

The dilemma is that you need cash you can access if you need it. Having more than 6 months' worth of emergency funds on hand is important, says Greg McBride, CFA, chief financial analyst at

“Having more than 6 months' worth of emergency funds on hand is important.”

"Especially if your circumstances have changed, such as a job or relationship (change)," he says. "But cash can be a drag on returns."

That's why McBride favors other liquid, top-yielding investments such as bank savings accounts or money markets that are insured by the Federal Deposit Insurance Corp.

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But understand that money market mutual funds offered by brokers aren't FDIC-insured. "Use them for putting money into the market at a moment's notice," McBride says. "They're not a permanent parking place."

Other drawbacks of liquid CDs

Liquid CDs aren't as fluid as they sound. Why not? They may tie up your money for at least a week after you open the CD. There also may be maximum and minimum withdrawal limits.

Consider these downsides to liquid CDs before putting your money into them.

Liquid CD downsides
Withdrawal limits

"Terms vary widely," McBride says. Some liquid CDs limit your withdrawals to once a year, others to once or twice during the CD's term.

For example, San Francisco-based First Republic Bank's liquid CD restricts withdrawals to 7 calendar days apart, or you'll be slapped with early-withdrawal fees. In Boston and Philadelphia, TD Bank's 12-month liquid CD allows you only one penalty-free withdrawal per term.

Larger minimum investmentsUnlike plain-vanilla CDs, liquid CD versions sometimes have higher minimums. For example, you may need to invest at least $10,000. If your CD dips below that amount, you'll pay early withdrawal fees.
Lower interest ratesLiquid CDs that mature in less than one year have vastly inferior yields compared to top yields on savings or money market deposits, McBride says. And with long-term CDs, how much are you willing to give up for the flexibility

Weighing your options

While the early withdrawal penalty is a risk with traditional CDs, short-term CDs -- such as those with 6-month maturities -- might be a good investment option for those considering liquid CDs.

Meanwhile, interest checking and money market accounts and can have more appealing rates. "And, you sacrifice nothing in terms of liquidity," McBride says. That's why it pays to shop around, since there's a lot of competition for your money.

Not only are many money market accounts easy to access, but they also throw in check writing.

"Liquid CDs are a marketing strategy," Levin concludes. "They're never attractive enough to recommend."

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